March 30, 2010: Had Shakespeare's hero Hamlet been a trader looking at oil and gas index, he would have asked, "to continue rallying or reverse now, that's the question."

The oil and gas index of the Indian markets has been consolidating for over an year. That is a pretty long consolidation period. It is not clear if the index will continue to rally or reverse.

Let us look at the charts of the oil and gas sector to get a sense of the what the market is telling us. Instead of putting several indicators and oscillators on the chart, let's look at price action. After all indicators and oscillators are derived from price, so let's look at the real thing--price.

The price action right now is inside an ascending triangle. Ascending triangles are bullish patterns for the simple reason that buyers are willing to higher and higher prices when the price falls. It also means that horizontal blue line that forms the top of the triangle is being hit a few times there by weakening resistance. Typically once prices break out of the top line, they rally.

If you look at the bottom of the chart you'll notice a similar ascending triangle and when prices broke out of the top line there was a nice rally. So now that we have another ascending triangle a rally is imminent right? History should repeat itself, correct? May be or may be not. Lets look more closely to find out.

The ascending triangle at the bottom of the chart was formed after a steep drop in price. The market was clearly oversold and a bullish pattern after a drop in price is an invitation to buy. It is a golden trade. The recent ascending triangle is after a rally in price, which should make the bulls more cautious. It could still be an opportunity to go long, but it's a silver trade.

Notice that price has not been able to break resistance as shown by the blue arrows. Even if prices break out the upside is limited as chart shows strong resistance at the 11762 area, a place from where prices fell strongly in early 2008. The 11762 area is shown by a red horizontal line. Additionally the 30-week moving average is flattening out, indicating that the bull is weak.

So just like Hamlet you'll be thinking, "to go or not to go long, that is the question." Here is what we'd do. If long we'd keep our stops below the upwardly sloping line of the recent ascending triangle. If we have no position, we'd trade the range inside the triangle, by shorting the at the top line and buying as the upwardly sloping line.

In case prices reach the 11762 area, we'd short as it's the first time back to the resistance area, which can lead to fall in price. If prices trade above 11762 area, the index can rally to 13820 (as shown by a red horizontal line near the top of the chart) as we have an air pocket. Allow us to explain air pockets. Air pockets are formed when prices fall very fast as shown on the top left of the chart. These areas act as vacuums sucking price back to the origin of the rally or fall. For instance, look at the air pocket at the bottom of the chart. The prices fell sharply, but also rallied back up sharply.

As you'll notice several conditions must be met to take a position in the oil and gas sector. This is necessary given the current price action of the sector. Trade carefully and remember oil is slippery.